Friends,
I hope that all is well with you and yours.
Sometimes, the moons and stars align, and most everything that you needed to line up lines up in perfect harmony. Other times, all kinds of crap that you wish you would not have to deal with come at you at once. This past week has been the latter.
First, our 15-month-old got ill. Then, as she recovered, we were hit by a blizzard and effectively snowed in. I am not exaggerating; this was the view from our media room on Wednesday.
And then, to add the rotten cherry to my admittedly very selfish heap of excrement, my wife had her biggest deadlines of the year to meet and a number of events to attend. All of this added up to, of course, no more than life with a small child as one might expect it. But it also meant very little time for me to write. I hope that what I managed to scribble down will still tickle your fancy. Forgive me if it does not.
Quick personal updates before we go-go
The last week notwithstanding, the new book is progressing nicely. Both Steve and I are very excited about it; I can say, without so much as a word of hyperbole, that it is (so far anyway) the best thing that I have ever written by quite some distance. For those unaware, any paying subscriber who chooses the "founding member” option will receive it delivered to their doorstep, signed by yours truly.
It is awfully flattering to see that so many of you have connected with me on LinkedIn. If you have yet to do so, please give me a follow. As I wrote last week, I am moving most of my social efforts off Twitter and would love for you to join me.
For any Swedish readers, I am now officially signed to MySpeaker for domestic keynotes. Should you be looking for a speaker, well, now you know where to go.
In the news
Wednesday, March 8, was International Women’s Day, and all over the world, brands were falling over one another to talk about the importance of equality. Of course, many were just paying lip service, as the Gender Pay Gap Bot was quick to point out.
The most overrated aspect of marketing is social media, at least in the eyes of marketers. Meanwhile, it is the most sought-after skill by recruiters. For any non-marketers out there, one of the two groups has overwhelming evidence to support their stance. I will give you a hint: it is marketers.
Affluent consumers are maintaining their luxury spend, much as premium subscribers already know (including why, but TL;DR: financially challenging times hit different groups differently). Of particular interest is still travel; nearly three-quarters of respondents in a Saks Fifth Avenue Luxury Pulse survey had already booked or were planning to book trips.
President Biden has been given the power to ban TikTok in what arguably is the most far-reaching US restriction on any social media app to date. Lawmakers voted 24 to 16 to approve the measure to grant the administration powers to ban the app, as well as any other app considered a security risk. Although the decision is reasonable given what is currently happening in the world, it also opens up for potentially problematic censorship down the road.
Item of the week
A bit of a spoiler here, but in two weeks’ time, we will be moving on to the next big theme: culture. The word is constantly used in all walks of corporate life, yet few who do seem to be aware of what it actually means. I always found this somewhat odd. Just as I would expect a marketer serious about their craft to have read people such as Byron Sharp, I would assume anyone serious about culture to have read people such as David Graeber. And so, as a primer of sorts, here is a roughly 25 minute video featuring the latter on why culture is not your friend. And yes, it echoes the negative approach to planning that I have been promoting.
A culture is what you won’t do; what you refuse to do. We have this idea that culture is these kinds of isolated pockets, that there is something primordial about them, but people have been in communication with each other forever. … So the question is not why some people borrow some things from other people, but why they don’t. If you look at the ethnographic tradition, what you see is people basically saying fuck you to their neighbors and refusing to adopt things that are often very practical. … Culture has a lot to do with defiance.
Moving on.
On ratios
Still a struggle for many
Recently, I noted on LinkedIn and Twitter that the tactically minded analyze companies under the assumption that doing thing A led to outcome B. The strategically minded, on the other hand, assume that companies sought to achieve something, maybe B, and by doing thing A (supported by C, D, E, F, G and H, under the context of I and the randomness of J) were able to do so.
Understanding financial metrics, to me, is filling in some of those additional letters. Far too often do I see self-professed analysts (especially in marketing, though I am aware that it may come out of a skewed sample) claim that the reason for a company’s success was The One Thing to Rule Them All, even though a quick glance at the annual report immediately disproves the suggestion.
And so, today, we are going to build on last week’s introduction and learn how to take a look - with one caveat: I had intended to discuss individual metrics, but there simply was no time. In order to make up for it, I have included a rather good cheat sheet.
So.
To recap, annual reports have so-called statutory accounts. These are mandatory, much as the name suggest, and include:
the income statement (is the firm profitable?),
the balance sheet (is the firm healthy?), and
the cash flow statement (where is the firm’s cash going?).
Each can provide insight into not only company affairs, but also what its strategy might be. After all, the easiest way to unearth a competitor’s intentions is to look at where their investments are going.
(As a quick aside, I feel this is one of the most rarely used strategic tools. Deft companies can play daft competitors by appearing as if they are heading in one direction, enticing others to follow, while actually doing something completely different. Financial reports can reveal the truth, but too few strategists bother looking. It still baffles me to this day.)
Ratio analysis is a useful tool with which to do the relevant work, whether to evaluate liquidity, efficiency, profitability, behavior relative to the industry norm, trends over time, or intent. As with any tool, one should not use it in isolation but as a part of a larger analytical toolkit.
The importance of individual ratios depends on the strategic endeavor at hand. Unfortunately, at least to some, this means that the strategist has to actually do their homework and perform a proper diagnosis. A very good cheat sheet, including easy-to-understand explanations of what the ratios mean, can be found here, but a good first step to understanding which ones matter most for the industry is usually to speak to the CFO.
While snapshots can be useful to sniff out bullshit quickly, ratio analysis of numbers over time is a better indicator of company trajectories. To illustrate, it might reveal whether strategic decisions actually had an effect, whether a firm’s present approach is actually working (a rather important point not least to those looking to emulate), if the company is heading in the right direction at the right tempo, or lagging behind the market. A company stating that its gross profit margin is 10% may be either brilliant (e.g., if the category average sits in single digits), woeful (e.g., if all its main competitors come in at 30% or more), nothing to worry about (e.g., it invested particularly heavily the year in question) or a reason to raise the alarm (e.g., it used to be 45% but has come down to 10% over a three-year period). Context matters.
Anyone working in business or corporate strategy thus has to be well-versed in ratio analysis, and most other strategists would do well to at least understand the basics. Next week, we will take a look at why, because…
Next week on Strategy in Praxis
…James Hankins, my co-conspirator in all matters e-commerce and one of the commercially savviest strategists I know, will be providing the practitioner’s insight interview to tie this whole thing together.
Until then, have the loveliest of weekends.
Onwards and upwards,
JP
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